FEATURE - The Institute of International Banking Law & Practice

FEATURE
Panelists noted that if the
beneficiary is a state agency, an
individual bank might have no
ability to insist that language
be changed. With this in mind,
what can banks do to get these
unsatisfactory formats
changed Banks need to have
the state legislators change the
forms. IIBLP has offered to try
and assist with this process.
Another perceived
troublesome trend involves
applicants taking original
standby letters of credit to
closings and later returning
the credits, trying to cancel
them. One delegate mentioned
that the issuing bank has little
choice but to chase the
beneficiary for cancellation if
the original is not required for
presentation as the beneficiary
may have gotten a copy.
One panelist recalled a court
case where a letter of credit
had been returned to the
issuing bank without a cover
letter and the issuing bank
cancelled the credit. The
beneficiary then drew and
claimed the credit has been
returned for safekeeping. The
beneficiary won the case.
One banker explained that
in his bank’s letter of credit
application, there is language
stating that if the applicant
returns the original credit to
the bank, the bank cannot
cancel the credit without the
beneficiary’s consent. He
added that occasionally his
bank will offer an indemnity
for large customers.
If a letter of credit is a bid
bond, then one panelist
pointed out that the issuing
bank can determine if the bid
has been awarded or not. If
the purpose is for a closing,
then the lender can take the
letter of credit to the closing
rather than delivering the
credit to the applicant.
The next trend discussed
was non-extension notices
under standby LCs. A
particularly problematic
situation is finding evidence
that the non-extension notice
was sent when there has been
a bank merger and the file
[from a predecessor bank]
cannot be located. Some banks
have a special place where
they keep these files with a
“no destroy” instruction.
Some years ago in the US in
the face of California’s reinsurance
fund crises, one
panelist remembers that a
California politician directed
her state officials to draw on
every standby letter of credit
and make banks prove they
had sent notices.
Beneficiaries would have a
problem knowing whether or
not credits are open. Even if a
beneficiary has not received a
non-extension notice, it still
asks for affirmation that the
credit is open. One delegate
suggested that perhaps
legislation is needed that
mandates that there is a final
expiration date of ten years
after issuance. At that point,
the credit would be dead no
matter what. Other
participants cautioned against
sending a non-extension notice
as an amendment.
Moving to the next
troublesome trend, one
panelist cited the increasing
number of standby draws, a
by-product of the struggling
economy. She noted that when
requiring a copy of a court
order or a judgment under a
credit subject to UCP600, an
issuing bank must be very
specific on what it wants to
see. ISP98 Rule 4.19 gives
guidance on what an issuing
bank should consider
requiring.
Another stiff challenge
banks are facing is compliance
with government regulations.
Banks are trying to interpret
what the regulations mean
because they are not always
clear. As banks deal with this
added dimension, it was
pointed out that banks need to
reexamine their pricing to
determine if it adequately
reflects the increased cost of
compliance.
Panelists briefly referenced
some initiatives. A joint effort
is underway between the
Bankers’ Association for
Finance and Trade (BAFT) and
the International Financial
Services Association (IFSA) on
how to interpret anti-money
laundering regulations. A
document based on the Bank
Secrecy Act/Anti-Money
Laundering Examination
Manual issued in 2007 by the
14 Documentary Credit World ■ June 2008